Aggregation of Income

BY CLUBBING OF INCOME

By

Shankar BoseInspector of Income-tax

MSTU, Puri

Sections 60 – 65

Transfer of Income without Transfer of Assets[Sec. 60]

Section 60 is applicable if the following conditions are satisfied:

The taxpayer owns an asset.

The ownership of asset is not transferred by him.

The Income from the asset is transferred to any person under a settlement, trust, covenant, agreement/ arrangement.

The transfer may be revocable or may not be revocable.

The transfer may be effected at any time.

In such cases, the income from the asset would be taxable in the hands of the transferor (the person who transfer the asset).

Section 60 has no application where corpus itself is transferred .

CIT vs GRANDHI NARAYANA RAO[1988] 173 ITR 593 (AP).

Revocable Transfer of Assets [Sec. 61]

By virtue of Section 61, if an asset is transferred under a “revocable transfer”, income from such asset is taxable in the hands of the transferor.

The transfer for this purpose includes any settlement, trust, covenant, agreement or arrangement.

S. 61 says that,

if a person

(i) makes a revocable transfer of assets, and

(ii) such asset generates income,

then such income will be taxed at the hands of the transferor even if the income-earning asset was standing at that point of time in the name of the transferee.

Sec. 62 says that even if transfer of an asset is revocable, then also the income from such asset will not be taxed (contrary to S. 61) in the hands of transferor

If

(a) the revocable transfer is made to a trust and the transfer is not revocable at least during the lifetime of beneficiary.

Or

(b) the revocable transfer is made to persons other than trust and such

transfer is not revocable at least during lifetime of the transferee person.

Or

(c) the transfer was made before 1.4.1961 and the same was not

revocable for a period exceeding six years.

And

(d) the transferor does not derive any benefit from such income.

S. 63 says that a transfer will be deemed to be revocable

If

(i) there is any provision for re-transfer ever of the income or asset in any way whatsoever to the transferor

And

(ii) there is any provision through which transferor can reassume the power over whole/part of the income or asset.

The underlying principle of S. 61 read with 62 and 63 is not different from S. 60.

Here, even if asset is transferred, income will continue to be taxed at transferor’s hands in the following three situations :-

(i) when there is any clause in the instrument of transfer to revoke the transfer during lifetime of the transferee under any circumstances or for any reason whatsoever

Or

(ii) when the transfer is not revocable during lifetime of transferee, true, but transferor derives some benefit directly or indirectly from the income

Or

(iii) though initially at the time of transfer neither the transferor derived any benefit nor there was any clause for revocation of transfer of asset during lifetime of transferee/ beneficiary, subsequently the transferor revokes it by any measure and income arises to him from such revoked asset.

The Calcutta High Court, in Chunilal Mulji Motani vs. CIT (1983) 139 ITR 166,176 (Cal), held that if a transfer is revocable then not only such part of income from transferred asset which went to the benefit of transferor but the entire income will be taxed in the hands of the transferor.

An Individual is assessable in respect of remuneration of spouse.[Sec. 64(1)(ii)]

If,

The taxpayer is an individual.

He/she has a substantial interest in a concern.

Spouse of the taxpayer(i.e. husband/wife of the taxpayer) is employed in the above-mentioned concern.

Spouse is employed in the concern without any technical or professional knowledge or experience.

Then, Salary Income of the spouse will be taxable in the hands of the taxpayer.

Income to be clubbed in the hands of the individual is limited to salary, commission, fees or any other remuneration received by the spouse, directly or indirectly, whether in cash or in kind.

If the husband and wife both have substantial interest in the concern and both are in receipt of remuneration from the concern, then the remuneration of both shall be clubbed in the hands of that spouse whose total income, before including such remuneration, is greater. [Circular no. 258, dated 14.06.1979].

Remuneration which is solely attributable to the application of technical or professional knowledge and experience of the spouse will not be clubbed.

Meaning of “Substantial Interest”

In the case of a company - If an individual beneficially holds (individually, or along with his relatives) 20% or more of equity shares in a company at any time during the previous year.

In case of a concern other than company – If an individual is entitled to 20% profit in a concern (individually, or along with his relatives) at any time during the previous year.

Regard must, therefore, be had to the nature of the business carried on by the concern, the nature of the technical or professional qualifications, knowledge and experience possessed by the spouse to whom the payment is made from that concern for the services rendered by that person.

CIT vs. R.JAYALAKSHMI [1988] 101 TAXMAN 350(MAD.).

INDIVIDUAL ASSESSABLE IN RESPECT OF INCOME FROM ASSETS TRANSFERRED TO SPOUSE. [Sec. 64(1)(iv)

If an Individual taxpayer transfers an asset, other than a house property, to his/her spouse directly or indirectly otherwise than (a) for adequate consideration, or

(b) in connection with an agreement to live apart

(the asset may held by the transferee-spouse in the same form or in a different form),

any income arising from such asset shall be deemed to be the income of the taxpayer who has transferred the asset.

This provision is not applicable to House Property because in that case the transferor is deemed to be the owner of the House Property and the annual value of the property is taxed in the hands of the transferor as per section 27.

Where a House Property is transferred without an adequate consideration by an individual to his/her spouse, although the transferor shall be the deemed owner of the house property and shall be subject to tax under the head “Income from House Property”, but if there is any Capital Gain on the transfer of such House Property, such capital gain shall first be computed in the hands of the transferee and thereafter the same will be clubbed with the income of the transferor as per the provisions of this section i.e. Section 64(1)(iv).

HOW TO COMPUTE?

The Income from assets transferred must be regarded in the same way as it would be if the asset has not been transferred.

CIT vs. Maharaj Kumar Kamal Singh [1973]89 ITR 1 (SC).

Exemption, deduction or tax incentives in respect of such income can be claimed by the transferor.

G.B.Banerjee vs. CIT[1979]117 ITR 446(Cal).

EXCEPTIONS

The income from the transferred assets shall not be clubbed in the following cases:

If the transfer is for adequate consideration;

The transfer is under an agreement to live apart;

If the relationship of husband and wife doesn’t exist, either at the time of transfer of such asset or at the time accrual of the income. Philip John Plasket Thomas vs. CIT (1963) 49 ITR 97 (SC).

EXAMPLE….

If “A” makes a gift to his fiancée then the income arising on the amount so gifted, shall not be taxable in the hands of “A”, even after their marriage, as the relationship of husband and wife doesn’t exist at the time of making the gift.

WHERE PART AMOUNT IS CONTRIBUTED BY SPOUSE.

In KUMARA RAO (DR. N.) VS. CIT (1988) 169 ITR 128(AP), the wife of the assessee constructed a House and spent a sum of Rs. 96,502 thereon. In that cost of construction, the assessee contributed a sum of Rs. 34,500.

It was held, on facts, that the income from the house property in proportion of 34.5/96.5 was includible in the assessee’s income as the same could be said to be attributable to Rs. 34,500 out of total cost of construction of Rs. 96,502.

The assessee made payments of premium on policy taken in the name of his wife. The maturity proceeds were invested and income earned thereon in the name of his wife.

The Assessing Officer clubbed such income in the hands of the assessee.

The Gujrat High Court upheld such action. The Court held that proximity between asset and income had to be considered irrespective of time lag between transfer of asset and income had to be considered irrespective of time lag between transfer of asset and actual income derived. DAMODAR K. SHAH vs. CIT (2001) 119 TAXMAN 882(GUJ.).

INDIVIDUAL ASSESSABLE IN RESPECT OF INCOME FROM ASSETS TRANSFERRED TO SON’S WIFE [SEC. 64(1)(vi)

Any income which arises from assets transferred directly or indirectly by an individual to his son’s wife after 1st June, 1973, otherwise than for adequate consideration, shall be included in the income of the transferor.

WHEN TRANSFERRED ASSET IS INVESTED IN BUSINESS………….

In cases where the asset is transferred to spouse /son’s wife, the transferred asset may be utilised in the business of the transferee and in that case the transferred asset becomes an indistinguishable part of the capital employed in the business and the income generated by that part of capital employed is also difficult to determine.

In such case the clubbable income is determined as below:

amount of investment out of transferred asset in the

business as on the first day of X total profit earned

previous year. in the Business.

total investment in the business

It becomes further difficult when the transferred asset is invested in partnership firm because others’ money are also invested. So in that case clubbable income is :-

amount of capital out of Interest( i.e. income )

transferred asset invested receivable by the

in the firm as on first day of X transferee from

the previous year the firm.

total capital employed by the partner-transferee

in the firm as on first day of previous year

INDIVIDUAL ASSESSABLE IN RESPECT OF INCOME FROM ASSETS TRANSFERRED TO ANY PERSON FOR THE BENEFIT OF THE SPOUSE OF THE TRANSFEROR [SEC. 64(1)(vii)]

The income from such assets shall be included in the income of the transferor to the extent to which the income is for the immediate or deferred benefit of his/her spouse.

In the case of such transfer, only the portion of income that is set apart for the benefit of spouse is taxable in the hands of settler.

CIT vs ARVIND H. DALAL (1999) 105 TAXMAN 24 (BOM).

INDIVIDUAL ASSESSABLE IN RESPECT OF INCOME FROM ASSETS TRANSFERRED TO ANY PERSON FOR THE BENEFIT OF THE TRANSFEROR’S SON’S WIFE [SEC. 64(1)(viii)]

Where an individual transfers any assets, after 1st June, 1973, to any person or association of persons, otherwise than for adequate consideration, the income from such assets shall be included in the income of the transferor to the extent to which the income is for the immediate or deferred benefit of his/her’s son’s wife.

Section 64(1)(vii) and (viii) will be attracted if transferor makes a declaration of trust and appoints himself as the trustee.

CLUBBING OF INCOME OF MINOR CHILD [SEC. 64(1A)]

If any income accrues to the minor child of an individual then such income will be clubbed at the hands of such individual even if there is no transfer of asset / income etc. as stated in earlier provisions.

Exception to this happens only if the minor earns the income by DOING MANUAL WORK OR APPLYING HIS SKILL, TALENT OR SPECIALISED KNOWLEDGE/ EXPERIENCE, OR THE MINOR CHILD IS SUFFERING FROM ANY DISABILITY OF THE NATURE SPECIFIED IN SECTION 80U LIKE PHYSICALLY DISABLED, TOTALLY BLIND ETC.

The minor’s income will be clubbed at that parent’s hand whose total income is more - if parents’ marriage is subsisting.

If they are separated, it will be clubbed at that parent's hands who maintains the minor child.

Once such parent is decided, the same will continue and the A.O. has to give opportunity of hearing to the other parent if he wants to club it at his/her hands.

Where the income of a minor child has been included in the total income of a parent, such parent shall be entitled to an exemption to the extent of such income or Rs. 1,500(Ss 10(32)) whichever is less, in respect of each minor child whose income is so included.

Minor child generally means, as per Indian Majority Act, 1875 whose age is 18 years or less. But if minor’s person and/or property is at the hands of guardian/court of wards, then he attains majority only on completion of 21 years.

If father gives loan to minor son it would be very much ‘transfer’ because essence of loan is enforceable contract and a minor cannot contract a loan as per Indian Contract Act, 1872. So it is to be treated as transfer of assets by father (CIT V Mriduhari Dalmia (1982) 133 ITR 0550 (Del).

If child was minor throughout the year but on the last day of previous year attained majority, income accruing to him cannot be clubbed.

If both the parents of the minor child are not alive then the income of minor child cannot be clubbed and the guardian of the minor child shall file the return of such income on behalf of the minor. It will not be included in the income of the guardian if the guardian is not a parent.

What is to be clubbed is the income before allowing deduction under chapter VIA.

ITO vs KULDEEP JAIN (2002) 81 ITD 379 (DEL. – TRIB.).

CLUBBING OF INCOME FROM PERSONAL PROPERTY CONVERTED INTO PROPERTY OF HUF [SEC. 64(2)]

When an individual converts, after 31.12.69, his self-acquired separate property into property of HUF to which he belongs, then the entire income arising from such property shall be deemed to be the transferor individual’s income, and

if on partition of family, part of such property is received by transferor’s spouse, then income from such portion of property of spouse shall be included in the transferor individual’s total income.

Liability for payment of tax even though income has been taxed at else’s hands [Sec. 65]

When an asset stands in one’s name but income therefrom is taxed at somebody else’s hands due to provisions of Ss. 60 to 64, then too the former (owners of assets) will be liable to pay the tax on that extent of income if the A.O. serves demand notice on them.

Thanks